Given the unfortunate legacy of the Pranab Mukherjee era at the finance ministry (2009-12), what must India do now (after a new government is installed on May 17, 2014) to get out of the mess it has dug itself into and restore its credibility as an attractive destination for foreign investors?
A few preliminary thoughts are provided below as far as financial system liberalisation is concerned.
Most of all, India’s policymakers need to realise that their past focus on traditional sources of foreign funding—the US, the EU and Japan—are now passe. These economies are in long-term trouble. Because of the embedded entitlements that simply cannot be funded through the normal rate of taxation, their economic models are broken. Sonia Gandhi as India’s Eva Peron wants us to emulate this failed model. The EU-US-Japan are hopelessly over-indebted. Their public finances are in need of repair. If these three large economies were not reserve-currency issuing blocs, providing excess global liquidity (of dubious value) to prop up their own economies through money-printing, they would (and should) now be under the ministrations of the IMF.
So, India needs to look at new sources of capital where the largest surpluses now reside, i.e. sovereign wealth funds, banks and asset managers in China, Korea, Taiwan, Singapore, Brunei, Malaysia, the Arab-OPEC oil exporting countries, Germany (as an exception in the EU) and to other large emerging markets (especially Brazil and South Africa) whose corporate firms are looking to establish global transnational networks on a reciprocal basis. Finally, rather than let financial and FDI liberalisation drift out of control as it has since 2009, India needs to initiate unilateral, non-reciprocal action to serve its own interests.
But what does India specifically needs to do so as to liberalise its financial system?
Let’s begin with the insurance sector. In no sector has India behaved as badly with foreign investors as in the insurance industry. By delaying beyond justification the passage since 2008 of the amended Insurance Bill, India has kept foreign investors hanging. India’s absurdly low FDI caps in insurance, and its unpredictable approach to insurance regulation, has diminished its image in the financial world.
This stance has punished the post-2004 foreign investors in insurance JVs who have done more than their fair share in keeping the private insurance industry going. But foreign partners have had to do so in an increasingly weak state of under-capitalisation and disrepair which bars them from making the investments